When spouses have been filing a joint tax return for years, and they suddenly find themselves filing individually because of divorce, it is common for both spouses to be unsure who may claim the children as a dependent for federal and state tax purposes.
At the outset, everyone should understand that only one parent may claim a child as a dependent in any given tax year. If both parents claim the child, it will set off a red flag in the IRS office and both parents will get a letter from the IRS.
The tax code is actually very specific about who can qualify for the dependent tax exemption. To some people’s surprise, the deduction has nothing to do with income but rather time – custody time. The parent with whom the child spends at least half the year (the majority of the time) has the right to claim the child as a dependent.
What tax benefit flows from claiming a child as a dependent?
This is an excellent question, because under the recent Tax Cuts and Jobs Act, the dependency credit was eliminated for 2018 through 2025. However, state tax credits still flow from the dependency exemption.
In addition to the dependency exemption, the ability to claim the child has other tax benefits. First, the custodial parent can file as head of household, which increases the standard deduction. Second, the custodial parent can claim an earned income tax credit, worth between $3,526 for one child and $6,557 for three or more children. Third, the custodial parent can qualify for the child care tax credit, which can range from $600 to $2,100, based on number of children and income.
While these benefits go the custodial parent only, the non-custodial parent has some tax breaks as well, including a tax credit of $2,000 per child under 17, and credits for payment toward a child’s college education up to $2,500.
Both custodial and non-custodial parents may deduct all medical expenses paid by them for the child.
With these tips in mind, it should be easier for divorced parents to plan out their tax advantages related to their children.
If you have questions about child dependent exemptions and divorce, contact us – we can help.